C O N F I D E N T I A L 6V

THIS DOCUMENT IS THE PROPERTY OF HER BRITANNIC MAJESTY'S GOVERNMENT

COPY NO 79 tober 1984

CABINET

*\ —

< ^ ^ £ > TORNADOS FOR TURKEY

M i n i s t e r o f Sta t e , Department of Trade and I n d u s t r y

THE ISSUE

B r i t i s h Aerospace have a l e t t e r o f I n t e n t from the T u r k i s h M i n i s t r y of Defenc upply 40 Tornado a i r c r a f t i n the Royal A i r Force (RAF) s t r i k e .̂ t o Turkey. The t o t a l c o n t r a c t v a lue would

£985 m i l l i o n , s p l - een the United Kingdom and i t s p a r t n e r s , West Germany and I t a l , U nited Kingdom share would be £573 m i l l i o n , i n c l u d i n g spares, t r a i n pund support equipment and e s c a l a t i o n .

The Turks are asking -term c r e d i t t o f i n a n c e a s u b s t a n t i a l Part o f the o r d e r . BAe have t h a t the United Kingdom share of the c r e d i t r i s k be shared be Majesty's Government, BAe and l t s s u b - c o n t r a c t o r s , and the co: 1 banks. They have sought the B r i t i s h Government1s support i n of an Export C r e d i t s Guarantee Department (ECGD) guarantee. The ary of State f o r Trade and Industry's a n-d the Secretary of State f o r Defe i n u t e s (Annex D), attached, discussed a t the Defence and Oversea Committee (OD) on 2 2 October, s e t out the background. OD i n v i t e d me" d a f u r t h e r paper t o Cabinet, T h e Secretary of State f o r Trade and I n i s content f o r me t o c i r c u l a t e t h i s paper.

^HE PROBLEM

3- Given the past h i s t o r y o f debt resch e d u l i n g by. rkey, and u n c e r t a i n Prospects f o r the T u r k i s h economy, ECGD cover f o r y i s v e r y l i m i t e d , Cover f o r new c r e d i t i s u n d e r w r i t t e n under i t s Se n a t i o n a l i n t e r e s t a c c o u n t . Under the l i m i t s a t present considered pru ome £30 m i l l i o n o f cover i s a v a i l a b l e (assuming cover of about £50 j f o r l a s t week's c°ntract f o r seven Airbuses i s agreed).

% E*' BAe's r e v i s e d proposal on Tornado (see below) would * ^ ^ ° . ^Posure f l i U i o n . This i s a s u b s t a n t i a l ^ ^ J ^ ^ e *posure o f £344 m i l l i o n considered by OD. But the. new l o w j g * ­

s t i l l r e q u i r e a M i n i s t e r i a l d i r e c t i o n t o ECGD and a s t , Parliament.

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C O N F I D E N T I A L

DISCUSSION IN OD

OD members recognised that there were important strategic d industria l arguments i n favour of supporting this sale . They

sidered, however, that the credit r i s k involved and the consequent Nation on ECGD cover for potential c i v i l orders, was too great to

v eptable .

PROPOSAL

Je^ti&ye now presented me with a revised proposal to reduce ECGD exj^£(ij«^on the sale , involving:

orease in the proportion to be paid in cash to ent;

b. a reduction in the proportion of the credit to be guaranteed by><§§n from 40 to 30 per cent.

D e t a i l are at Ann„ s he effect i s to reduce requested ECGD exposure from £344 m to £228 mi l l ion . United Kingdom content would remain the samei

SIZE OF ORDER

BAe have, again, asked |ks i f they would be prepared to buy fewer a ircraf t (say 20) at 1 ' t i a l l y . The Turkish forces are firm that such an order would b^ jCeptable, because i t would be uneconomic to provide the necess ~11 ground support to cover fewer Planes. The Turks are, however, l n

to increase the proportion paid cash to 25 per cent.

CONTRACT PRICE

Ministry of Defence shares thi s view. Contact values are based on a P'ice per aircraf t of $19.7 mi l l ion , which has been held since end-1983. T ° this has to be added two years ' spares, t r a i n i n j ^ r o u n d supporl e q u i p m e n t and escalation.

LIKELY ATTITUDE OF ITALY AND GERMANY

9 - Past precedents on collaborative ventures i n d i c a t e Partners w i l l f a l l in behind the lead partner in the pro credit. The Secretary of State for Trade and Industry recffn fche order with the I t a l i a n Minister of Industry and Commerc< indicated that I ta l y would be able to provide support alongs Partnov­

n r S ' T h e M i n i s t r o ft h a t y Defence consider i t is"reasonable tfc w

west Germany w i l l come up with their share of the credit r

C O N F I D E N T I A L

C O N F I D E N T I A L

PRIVATE SECTOR SHARE OF RISK

B A e have confirmed t h e i r w i l l i n g n e s s , w i t h t h e i r p r i n c i p a l v ^ W - c o n t r a c t o r s , t o take a s u b s t a n t i a l share of the c r e d i t r i s k ,XvMrP t o ner denendinw nn h n u m n r thr> hanlre t-alro ^ Tttoiv44 00 per cencentt depending on how muchh the banks take.) T h e i r d i s c u s ­

w i t h the c l e a r i n g banks are c o n t i n u i n g and I w i l l r e p o r t f u r t h e r "eagues.

DII ^F^LOW-ON BUSINESS

a T ^ & p a r e s

Apar̂ M̂ja the spares package i n c l u d e d i n the i n i t i a l c o n t r a c t packaw^fthe United Kingdom would b e n e f i t from f u r t h e r spares sales b r o a d l ^ e q u i v a l e n t i n value t o the o r i g i n a l c o n t r a c t , on cash terms, over the l i f e of the a i r c r a f t .

b. Weapons

As t h i s i s an 5j n f i g u r a t i o n , t h e re are good prospects f o r the sale of r e l a systems from the United Kingdom amounting up to £250 m i l l i o n , aga • cash b a s i s .

OTHER SALES PROSPECTS 1 2 - BAe be l i e v e t h a t t h e i r ^ n e g o t i a t i o n s w i t h Saudi Arabia f o r the sale of 20 Tornado a i r c r a i be m a t e r i a l l y a s s i s t e d by an order from Turkey, given c u r r e n t b i l a t efence discussions between the two c o u n t r i e s on shared support Gaining. E q u a l l y , i f the Turks order French Mirage 2000s, the FretNeg0

spects i n Saudi w i l l be enhanced, t i a t i o n s are a l s o t a k i n g place e t o Oman. Longer-term prospects

include Kuwait and the Far East. EMPLOYMENT 4/^ This order w i l l b e n e f i t some 65 sub-c- c o i r t r a c tT l l

f i r m s ( l i s t e d a tCount Annex B) are w i d e l y d i s t r i b u t e d throughout.the T o m a i - n t a i nd e l i , . ^ " c o n t i n u i t y o f pr o d u c t i o n f o l l o w i n g completion of

e r i ^ S t oA n n the RAF, an export oorder w i l l be re e a r l y next year,HTr^-p_ i l l u s t r a t e s t h a t- the T u r k iw . . w i U 1 » i s h order ( i n c l u ^ bhe expectedl r e

i f C f o l l o w - o n business on weapons) would ensuren i f t \ t e n t i o n of s i g ­

l c a n t employment throughout the i n d u s t r y from 198 ) 9 0 ; t h i s s t8 t o a peak o f 1 0 , 0 0 0 _ j o b s i n 1 9 8 8 - 8 9 This average°f 500 jobs at BAe Wharton over the e n t i r e p e r i o d . C T I N GI ^ ? ^ TREATMENT AND IMPLICATIONS FOR OTHER BUSINESS

A J > AGREED !4. x:

c u r l t e o l i y has a good record on payment f o r m i l i t a r y sales but a U e s d e i d ec o V e f ? t h a t support should be given f o r the Tornado Styr

o r d i n a r* i s k * y c i v i l business i n Turkey w i l l be withdrawn, u n k 1 8 taken elsewhere than on ECGD's t r a d i n g accounts. OD has a]

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ll/^ ^ v i t e d me to consider arrangements to meet, without detriment to c i v i l business, the large credit requirement for arms sales . I shal l

c o m^ v * £ e i N 8 forward with recommendations shortly,

"VLUSION

recognise the problem in regard to credit . But the strategic u s t r i a l case i s strong. Provided the banks' reactions are

, I think we should allow BAe to go ahead.

16. Ix colleagues to agree ECGD support for the revised BAe Proposal

M 2

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ANNEX A

E m i l l i o n s

C ° n t r a c t value

Figuresby OD

985

discussed

C a s h Payment C r edit­

requirement U K Share ( 5 8 % )

T ° t a i

148 (15%)

837

487

860 & ^ t e r S S t ) r e

^ ^ ^ s h a r e

( p r i n c i p a l

344 (40%)

f l i e r s 516

Revised BAe proposal

985

246 (25%)

739

429

760

228 (30%)

532

A N N E X B

TORNADO EQUIPMENT S U P P L I E R S

COMPANY

AEROQUIP

AIRSCREW HOWDEN AUTOMATIVE PRODUCTION BAe

B E S T O B E L L B R I S T O L COMPOSITE M A T E R I A L S B t *ITlSH OXYGEN CO CHELTON

COMPUTING D E V I C E S CO LTD COSSOR E L E C T R O N I C L T D UARCHEM AERO L I M I T E D D ^ V A L L GEAR CO L T D

°ECCA N A V I G A T O R CO L T D DOWTY E L E C T R I C S °OWTY ROTOL DUNLOP L T D D"NLOP LTD D U N L O P LTD

P A I R E Y HYD L T D P E R R A N T I L T D P E R R A N T I L T D

GLOSTER SAR L T D G R A V I N E R L T D H L C H TEMPERATURE E N G I N E E R I N G HYMATIC E N G I N E E R I N G COMPANY L U C A S AEROSPACE L I M I T E D

TOWN

RE D D I T C H WEYBRIDGE

WESTHOUGHTON H A T F I E L D , WEYBRIDGE SLOUGH B R I S T O L HARLOW MARLOW ST LEONARDS-ON-SEA HARLOW STOCKTON-ON-TEES WELHAM GREEN NR. H A T F I E L D

LONDON CHELTENHAM CHELTENHAM GATESHEAD LOUGHBOROUGH COVENTRY HOUNSLOW EDINBURGH MANCHESTER HUCCLECOTE SLOUGH FAREHAM R E D D I T C H WOLVERHAMPTON

LUCAS AEROSPACE L I M I T E D BRADFORD LUCAS AEROSPACE L I M I T E D BURNLEY LUCAS AEROSPACE L I M I T E D BIRMINGHAM LUCAS AEROSPACE L I M I T E D HEMEL HEMPSTEAD LUCAS AEROSPACE L I M I T E D LUTON LUCAS AEROSPACE L I M I T E D COVENTRY LUCAS AEROSPACE L I M I T E D BRADFORD LUCAS E L E C T R I C A L E L ECTRON BIRMINGHAM MARCONI A V I O N I C S ROCHESTER MARCONI A V I O N I C S LTD BASILDON MARCONI CO LTD STANMORE MARCONI INSTRUMENTS L T D STEVENAGE MARCONI INSTRUMENTS L T D LUTON MARSTON L U B R I C A N T S LTD LIVERPOOL MARSTON PALMER L T D WOLVERHAMPTON MARTIN BAKER HIGHER DENHAM

NR. UXBRIDGE FORMALAIR-GARRETT L T D YEOVIL P A G E E N G I N E E R I N G CO L T D SUNBURY-ON-THAMES P L E S S E Y C A P A C I T O R S L T D TOWCESTER P L E S S E Y CO L T D ILFORD R L E S S E Y CO L T D FAREHAM P L E S S E Y CO L T D HAVANT P L E S S E Y CO L T D POOLE ROSEMOUNT BOGNOR REGIS SANGAMO WESTON L T D ENFIELD SMITHS I N D U S T R I E S BISHOPS CLEEVE S M I T HS I N D U S T R I E S L I M I T E D LONDON SMITHS I N D U S T R I E S LTD BASINGSTOKE SMITHS I N D U S T R I E S LTD CHELTENHAM S M I T H S I N D U S T R I E S L T D RUGBY S R E RRV V I C K E R S HAVANT

R A E L E C T R O N I C S L T D L T LONDON

GREENFORD ULTRA ELECTRONICS LTD WESTLAND HELICOPTERS LTD YEOVIL

BLETCHLEY WESTLAND HELICOPTERS LTD

BURTON-ON-TRENT WOODVILLE POLYMER ENG LTI

NOTE:

F « V t h e a i r f r a m e andt h eT h i s l i s t c o v e r s o s ! y t h e s u p p l x e r s f o r ' i o n i c dv i o n i c ss equipmenequipmentt anand doedoess not inc lude Ro l l s Royce or o ther

engine equipment s u p p l i e r s .

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ANNE X D

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TORNADOS FOR TURKEY

1 have seen Norman T e b b i t ' s recent minute t o you on t h i s sub • ^ e c t - U n f o r t u n a t e l y , I s h a l l be out of the coun t ry when the sub Dect i k i d e r e d i n OD, and Adam B u t l e r w i l l represent s t o e c o n s

Hie a t t h © m e e t i n g . I should pu t on record-, however, t h a t my view of e balance of r i s k s and advantages on t h i s mat te r co inc ide s w i t h

a t °f Norman T e b b i t .

1 a l so agree w i t h Norman's conc lus ion t h a t the Government t o°Ught f i n d some s p e c i a l way of p r o v i d i n g the c r e d i t support b 6 requested, sub jec t t o B r i t i s h Aerospace being able t o arrange

Pr iva te sec to r share of the r i s k . As I sa id i n my minute t o you ^ 0 13th August , q u i t e apa r t from the i n d u s t r i a l arguments i n

°f Government suppor t , Turkey ' s p o s i t i o n on NATO's f l a n k itiak <-ne Tornado deal of p a r t i c u l a r m i l i t a r y s i g n i f i c a n c e t o the

A l l e as a whole .

3 X a m s e n ° ^ l nto i* . g copies o f t h i s minute t o o the r members of OD, Tom Kin 9J and S i r Robert Armstrong

3 ^ S t r y o f Defence Oct ober 1984

2

PRIME MINISTER

TORNADOS FOR TURKEY

1 minuted you on 10 August on d i f f i c u l t i e s a r i s i n g for us i n

p rov id ing expor t c r e d i t support fo r the p rospec t ive sale t o

the Turk i sh a i r f o r c e of 40 Tornados. N i g e l Lawson, Q u i n t i n

Hailsham, Michael H e s e l t i n e , Janet Young and A r t h u r

Cockf i e ld have a l l commented. The problem a r i ses

e s s e n t i a l l y from the l a rge payment r i s k exposure t h a t would

a r i se which cannot be accepted by ECGD as a normal Sect ion 2

ope ra t ion , even on the basis of r i s k shar ing w i t h the

P r iva te s e c t o r .

When I wrote be fo re , we were look ing a t a p o t e n t i a l UK

° r d e r of about £435m (which would have meant an exposure

^ k i n g i n t o account i n t e r e s t e tc of about £600m). BAe have

since r ev i s ed t h e i r est imates and have t o l d us t h a t , w i t h c o s t e s c a l a t i o n , spares e t c , and w i t h the p r i v a t e sector b e i n g unable t o support more than 60% of the r i s k , the

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f i g u r e s would work out s i g n i f i c a n t l y h i g h e r , as f o l l ° w S

£m

T o t a l c o n t r a c t value 985

UK share (58%)

UK c r e d i t (85%)

T o t a l exposure ( i n c l u d i n g

of which : ECGD exposure

P r i v a t e sector (60%)

i n t e r e s t

(40%)

e t c )

571

485

860

344

516

The, T u r k i s h Defence M i n i s t e r has t o l d Michael H e s e l t i n e

they w i l l award us the c o n t r a c t fo r t h i s sale now pro^ 1

u p come we can o f f e r f i nance , and BAe are under pressure to tha 1

w i t h c r e d i t p roposa l s . However, there i s no evidence

the T u r k i s h M i n i s t r y of Finance has yet approved the deaJ

the The Turks have emphasised t h a t fo r o p e r a t i o n a l reasons

order cannot be reduced i n s i z e . Al though ECGD's e*P° ewould be very l a r g e , the ba lancing share to be c a r n

the commercial banks and BAe and i t s p r i n c i p a l BAe

sub-con t rac to r s has a l so increased s u b s t a n t i a l l y -

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b e l i e v e t h e r e i s a r e a s o n a b l e p r o s p e c t o f t h i s r i s k s h a r i n g a r r a n g e m e n t b e i n g t a k e n by t h e p r i v a t e s e c t o r , a l t h o u g h i n

ECGD's v i e w t h i s i s d o u b t f u l and i t i s a l m o s t c e r t a i n t h a t t h e l a t e r m a t u r i t i e s w i l l f a l l t o HMG t o s u p p o r t .

r e a l i s e t h a t t h e a r g u m e n t s a r e c a r e f u l l y b a l a n c e d h e r e . T h o s e i n f a v o u r o f g i v i n g t h e HMG s u p p o r t n e c e s s a r y t o s e c u r e t h e o r d e r a r e as f o l l o w s :

a ) The i n d u s t r i a case i s s t r o n g , as I made c l e a r i n my

m i n u t e o f 10 A u g u s t . I a c c e p t N i g e l Lawson's p o i n t

t h a t t h e r e i s no commitment t o t h e EFA programme a t

P r e s e n t . T h i s makes e x p o r t o r d e r s f o r T o r n a d o s t i l l

more s i g n i f i c a n t i n d u s t r i a l l y . B e s i d e s T u r k e y , I

u n d e r s t a n d t h a t t h e r e a r e a l s o e x p o r t p r o s p e c t s i n

S a u d i A r a b i a and Oman ( i n i t i a l l y 20 and 8 a i r c r a f t

r e s p e c t i v e l y ) . B o t h a r e g o i n g t o be d i f f i c u l t and a r e

l i k e l y t o be s t r o n g l y i n f l u e n c e d i f we can s e c u r e t h e

T u r k i s h o r d e r . Taken t o g e t h e r , t h e s e t h r e e

P o s s i b i l i t i e s o f f e r an o p p o r t u n i t y f o r t h e UK t o

i m p r o v e i t s d i s a p p o i n t i n g r e c o r d i n l a r g e d e f e n c e

e x p o r t c o n t r a c t s ( a s compared f o r e x a m p l e w i t h t h e p r e n c h ) . Some measure o f t h e i n d u s t r i a l i m p o r t a n c e o f

t h e T u r k e y s a l e c an be gauged f r o m BAe employment

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taff at p r o j e c t i o n s . There are 4000 d i r e c t p roduc t ion s

2500 WWarton. BAe es t imate t h a t these w i l l reduce to The 1990 even i f the Saudi and Oman orders are won

T u r k i s h order alone would enable an a d d i t i o n a l 500

p roduc t ion s t a f f to be mainta ined through to 1990;

b) The Tornado programme i s a l so of great s i g n 1 1

t o the aero engine and equipment i n d u s t r i e s . R°l^5

Royce's share of the T u r k i s h order i s est imated t 0

amount t o £60 m i l l i o n i n i t i a l l y , p lus a fu r ther

m i l l i o n i n spares business;

Id w 0 u

c) The main repayments on any c r e d i t for Tornados

not commence u n t i l around 1987/88;

d) We must recognise t h a t the Turks place great us

r mimportance on the purchase of these a i r c r a f t f ° may and our p a r t n e r s . A r e f u s a l t o p rov ide finance

damage r e l a t i o n s w i t h a count ry which , as Janet

p o i n t s o u t , i s one of our c loses t a l l i e s . On the we

other hand, the Greeks can ha rd ly complain , since i t :

c t e < o f f e r e d them the a i r c r a f t as w e l l and they r e j e

e) I f the UK does not supply these a i r c r a f t the Tu r*5

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w i l l probably buy them elsewhere. The USA or France

w i l l be on ly too ready to d i sp lace us, and can be

expected t o have fewer d i f f i c u l t i e s i n o f f e r i n g f inance

on favourable terms; and

f ) The Turks have sc rupu lous ly met t h e i r o b l i g a t i o n s t o

date on BAe's e x i s t i n g sales of Rapier and Sea Skua

m i s s i l e s (which were mainly fo r cash) .

Th e main arguments agains t HMG support are

(a) The r i s k exposure now proposed of about £350m i s

far above ECGD's e x i s t i n g market l i m i t s f o r Turkey,

which w i l l be f ac ing d i f f i c u l t debt s e r v i c i n g problems

from 1985 onwards as p r e v i o u s l y rescheduled debts f a l l

due fo r payment aga in ;

(b) Al though Turkey ' s recent record on m i l i t a r y debts

has been s a t i s f a c t o r y , Turkey has rescheduled i t s c i v i l

debts on many occasions , and ECGD i s s t i l l owed some £ l 2 0 m which w i l l not be r epa id f i n a l l y u n t i l 1992;

( c ) BAe have a l ready had the b e n e f i t of almost a l l of

the new medium term ECGD cover fo r Turkey a l l o c a t e d so

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fa r (some £77m fo r Rapier and Sea Skua miss i les )? the

normal commercial expor ts have increased by 40% i n

at f i r s t seven months of 1984 and are c u r r e n t l y running

an annual r a t e of £330m; i f support on the scale _ i t y to

proposed i s agreed t h i s would pre-empt any capac-1

g ive cover for other p r o j e c t business (which would

undoubtedly cause v igorous p ro t e s t s from many UK a ncompanies, c u r r e n t l y n e g o t i a t i n g i n Turkey ) ; ^

(d) There must be doubts about the a b i l i t y of the a"d

p r i v a t e sector to ca r ry i t s share of the exposure

so there i s a r i s k t h a t BAe w i l l ask for more HMG

support l a t e r .

t o b e

5 'As I mentioned i n my previous minu te , i f ECGD were eI d °

i n s t r u c t e d t o take a commitment of t h i s o rde r , i t wou f o r t h e

necessary fo r t h i s t o be announced to Par l iament and

commitment t o be taken ou t s ide ECGD's t r a d i n g accounts­

6 This i s a d i f f i c u l t d e c i s i o n . On the one hand the

concern a t Turkey ' s economic prospec ts . On the other +• r i ^ l

the case i s s t rong on s t r a t e g i c , p o l i t i c a l and indus ht t °

grounds. On balance I recommend t h a t Government ou<3n

f i n d some s p e c i a l way of p r o v i d i n g the support being

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requested, subjec t t o BAe being able t o arrange the p r i v a t e

sector share of the r i s k . I t would , of course , be

necessary fo r BAe1s German and I t a l i a n pa r tne rs t o be

Prepared t o take t h e i r share of c r e d i t r i s k s , but I be l i eve

that they would be l i k e l y t o do so g iven a lead from the UK,

I am copying t h i s t o members of OD, t o Tom King and t o rS i Robert Armstrong.

A /1

N T

September 1984

e p a r t m e n t of Trade and i n d u s t r i

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